GFL Environmental Inc
TSX:GFL
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GFL Environmental Inc
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Welcome to the GFL Environmental Fourth Quarter Earnings Call. My name is Juan and I will be coordinating your call today. [Operator Instructions]I will now turn over to your host, Patrick Dovigi, Founder and CEO of GFL Environmental. Please Patrick, go ahead.
Thank you, and good morning. I would like to welcome everyone to today's call and thank you for joining us. This morning we will be reviewing our results for the fourth quarter and providing our guidance for 2022. I'm joined this morning by Luke Pelosi, our CFO, who will take us through our forward-looking disclaimer before we get into the details.
Thank you, Patrick. Good morning, everyone and thank you for joining. We have filed our earnings press release, which includes important information. The press release is available on our website. We have prepared a presentation to accompany this call, that is also available on our website. During this call, we will be making some forward-looking statements within the meaning of applicable Canadian and US securities laws, including statements regarding events or developments, that we believe or anticipate may occur in the future.These forward-looking statements are subject to a number of risks and uncertainties, including those set out in our filings with the Canadian and US Securities Regulators. Any forward-looking statement is not a guarantee of future performance and actual results may differ materially from those expressed or implied in the forward-looking statements. These forward-looking statements speak only as of today's date and we do not assume any obligation to update these statements whether as a result of new information, future events and developments or otherwise. This call will include a discussion of certain non-IFRS measures, a reconciliation of these non-IFRS measures can be found in our filings with the Canadian and US Securities Regulators.I will now turn the call back over to Patrick, who will start off on Page 3 of the presentation.
As we look back and reflect on what we accomplished in 2021, I'm happy to say I've never been prouder of the entire GFL family. While we had all hoped that COVID will be behind us with the vaccine roll-out in Canada and the US, I think we can all agree it hasn't been as smooth as we would've liked, particularly here in Canada. Add to that the labor shortages in some markets, building inflationary pressures and overall supply chain disruptions, there's been a lot of challenges to deal with. And as a result, that we can only overcome all of these challenges. The quality of our asset base and market selection continues to be the foundation of our growth. The strength of our brand supported our talent retention and the dedication of our team allowed us to excel.GFL now stands with more than 18,000 employees, nine provinces and 26 states in the US. Every day we go out and we drive to win. I think it's safe to say that no one outwork us and I believe that's what distinguishes us from others. Count on us not to take easier path, but to take the most accretive path. The proof is in the headline results. Revenue for the year grew by over 30%. Our adjusted EBITDA grew closer to 40%. Adjusted free cash flow grew over 50% and we have exceeded expectations for eight consecutive quarters as a public company. How we were able to consistently achieve these results? I believe that GFL is different. The collective equity ownership of our management team far exceeds that of any others in our industry and I believe that alignment drives a relentless focus on long-term value creation.We are laser-focused on the leverage of our growth strategy that have guided us since our IPO, drive organic growth and margin expansion, rationalize our balance sheet to optimize our asset base and reduce debt cost and execute on strategic accretive acquisitions. ESG continues to be a focus, it is core to our organic growth strategy. We released our updated sustainability report for 2020 in Q4 and we will be releasing our sustainability action plan with our ESG targets, goals and objectives in our 2022 sustainability report later this year.As we'll discuss later in more detail later on the call, CapEx in 2022 includes investments in our recycling business, in fleet conversion to CNG and in RNG projects at our landfills to support our sustainability action plan commitments. In the phase of the pandemic, we deployed CAD2.3 billion on 46 acquisitions, with our focus on rationalizing our balance sheet, we were also seller of assets when it makes sense to ensure we are achieving the highest invest return from our asset base.In 2021, we sold non-core assets in three separate divestures from what we realized approximately CAD250 million in proceeds, giving us additional capitals to deploy the higher organic growth opportunities in our base business. Later in this call, we will discuss our plans for our infrastructure services business, which is more involved in the divestures we have done to date, but the underlying strategy is consistent, taking the path that we believe will drive the greatest value for our shareholders from our assets.As I mentioned, rationalizing our balance sheet also means focusing on our capital structure. So, I'll touch briefly on our view of the impact of higher interest rates. I think you need to look at GFL differently than other industry players, who are already investment-grade. As our credit quality continues to improve with our increasing free cash flow, we still have lots of room to decrease our cost of capital.We believe that the spread compression on rates we can realize as a result of that improvement in our credit quality will mitigate the risk of higher interest rates. And point us altogether, I believe that 2021 is another example of GFL executing on what we said we were going to do when we went public. We buy when we see accretive opportunities, we prune when we see opportunities and deploy our capital and we invest when we see opportunities to add complementary lines for our business like R&D and doing all of that we create value for our shareholders.I'll now pass the call over to Luke, who will take us through the financial results and guidance.
Thanks, Patrick. I'll pick up on Page 5 of the presentation. Revenue for the quarter increased over 25% compared to the prior year period, which was a CAD125 million greater than the guidance we provided in November. While the real performance was primarily driven by contributions from M&A, we also exceeded our targets for solid waste pricing and volume, which came in at 5.1% and 3.4% respectively. The price growth was 80 basis points better than Q3 and was supported by a pull-forward of price increase plans in certain US markets to respond to cost inflation.Included in the volume growth is the impact of some opportunistic ancillary revenues we picked up in our Western Canadian operations. Commodity prices softened versus the peak we saw in Q3, so that was a modest drag on the quarter as compared to guidance. Specifically on M&A, we saw meaningful volume in the Terrapure liquid business continued straight through to December, a deviation from a difficult seasonality profile. We also saw growth exceed expectations in certain of the new US markets, that came through the Q4 2020 acquisitions.It's not uncommon that in perfect information on the contribution cadence of recent M&A and as of late, COVID related disruptions and then subsequent catch-ups have compounded some of this forecast uncertainty. Infrastructure and soil remediation continued to see delays in the start-up of new projects, but our pipeline of new opportunities remains robust and our outlook for this segment, as we finally get the other side of COVID restrictions is exceptionally positive.On Page 6, you'll see adjusted EBITDA for Q4 of CAD388.3 million and a margin of 25.2%. The decline in commodity prices help performance of the relatively lower margin M&A contributors and the ancillary Western Canadian revenues, all combined to partially offset the base number for margin that was largely in line with guidance. While internal cost inflation continue to rise and now sits around four, we view this quarter as a continued demonstration of the capacity of our platform to respond with price levels that not only cover the cost escalation, but drive organic margin expansion as well.Looking at each of the segments, solid waste margins were 30% or better every quarter this year up first for the company and a result that is all the more impressive when considering the inflationary backdrop under which it was achieved. Excluding the impact of M&A, macro headwinds and certain one-time gross collection volumes, margins expanded organically 20 basis points quarter-over-quarter, driven by pricing and overall operating leverage.The margin drag from rising fuel prices was partially offset by benefits marked from commodity pricing. For the year as a whole, solid waste margins expanded 90 basis points, with organic margin expansion in both of our geographies. Liquid waste margins were 21.7% for the quarter and were impacted by the outsize and diluted revenue contribution from Terrapure. Terrapure margins are right in line with exceptions and we can do with expectations and we continue to see a path to bring the Terrapure liquid revenues up to and then above the average margins for the liquid segment.For the year as a whole, liquids margins increased 80 basis points, overcoming a 100 basis points headwind from M&A and demonstrating the operating leverage associated with post-COVID volume recoveries that we had forecasted. Infrastructure and soil margins improved over 400 basis points period-over-period, as the soil volumes recovery continued and we're able to leverage the relatively fixed cost structure of the segment. While the first part of 2022 will be challenged on margins from a quarter-over-quarter comparison perspective, we're confident in our ability to use our pricing levers, as well as cost and asset-based optimization to drive sustained and ongoing margin expansion over the near and longer-term.On Page 7, you can see adjusted cash flow from operating activities of CAD321 million, a 33% increase over the prior period. We completed another asset divestitures during the quarter, bringing total proceeds from asset disposals for the year to approximately CAD260 million. As previously discussed, we are redeploying these dollars into attractive high return growth initiatives within the base business.Because of the success of our portfolio rationalization effort, outpaced our ability to redeploy the proceeds into the business, we have a timing difference between dollars received and dollars deployed. As such, for the annual adjusted free cash flow reconciliation, we've included an adjustment to exclude the excess proceeds realized from asset disposals with the intensive burdening the adjusted free cash flow number with a normalized level of CapEx. When we discuss our guidance for 2022, we'll provide additional color as to how we're thinking about the treatment of these excess proceeds.During the quarter, we normalized for an incremental CAD5.6 million of working capital related to recent M&A that we believe is better characterized as part of purchase price. We believe our cash collection towards the end of December were modestly impacted by disruptions from the rapid spread of Omicron over the holiday period and also our working capital was negatively impacted by just under CAD10 million as a result of the required repayment of 2020 payroll taxes previously deferred under the Cares Act. Despite this CAD10 million to CAD20 million working capital headwind, we realized over CAD540 million of adjusted free cash flow for the year, a result ahead of our guidance and representing over 50% growth as compared to the prior year, an outcome that we believe continues to demonstrate the attractiveness of our ongoing free cash flow growth opportunities.Turning to Page 8, in terms of net leverage, we ended the year as anticipated at 4.75 times in part due to the previously announced issuance of USD300 million preferred equity. We deployed approximately CAD1 billion into 17 acquisitions during the quarter. Now over CAD900 million of this was completed when we last spoke in November. So it's about CAD90 million deployed into nine tuck-ins as the net new numbers since we last spoke.For all the acquisitions completed during the year, we expect to generate annualized revenues of approximately $785 million. We previously guided towards the rollover of approximately CAD450 million related to M&A. We still believe that to be an accurate net number as the new CAD50 million of revenue acquired since our last guidance is largely offset by the timing differences related to Terrapure and the incremental negative rollover from incremental divestitures. From a liquidity perspective, we start the year with nearly CAD200 million of cash on hand and an undrawn revolver which we think is an ideal setup, providing maximum optionality as we evaluate growth opportunities for 2022.
Kicking off on Page 10, we wanted to highlight what we believe to be the final significant step in our near-term portfolio rationalization initiatives. Our infrastructure and soil remediation segment is comprised of two divisions with two different margin profiles, a mid-teen service component and a high 20 soil division. The soil division is a service line that the entire industry participates in, but the services division has a different investment profile relative to our core solid and liquid waste businesses.We believe that our services division leadership team is best-in-class and with pride has given the opportunity to invest incremental growth capital into its business. That investment has been tempered under the GFL as we've been focused on deploying capital into our solid and liquid waste businesses. On Page 11, we outline our plan, we will bring together our services business with COCO Paving to create a leading infrastructure services growth vehicle called Green Infrastructure Partners. COCO is a leading vertically integrated civil infrastructure company with highly complementary assets and service offerings to our existing infrastructure business.I will be the Chairman of the new entity and oversee the new management team, which will be a mix of existing GFL and COCO leaders. With a CAD180 million of proforma EBITDA and meaningful M&A pipeline, we see a highly attractive value creation opportunity by spinning-off the infrastructure services business and allowing to capitalize on the value creation that we believe will far exceed its value within size GFL.The form of the transaction we'll see a sell the infrastructure business, the Green Infrastructure Partners for cash and equity interest in the new entity. When complete, we will no longer recognize the results of infrastructure services within GFL financial statements. Instead, we will carry our investment in Green Infrastructure Partners that we can monetize overtime as value is created. While the timing of the infrastructure services the venture is still a moving target, we intend to execute the plan in the near-term. Page 12 illustrates the impact of divestitures to GFL post transaction.In summary, the weighting of solid waste in the portfolio increases, EBITDA margins increase and the retaining soil remediation division will be combined with our liquid waste segment and renamed environmental services simplifying our overall segment reporting. And finally, while not listed on the page, we think there's an opportunity to take the cash component of the consideration we got for the infrastructure business and redeploying into near-term M&A opportunities to backfill the divested infrastructure services EBITDA. With the increase in the leading of solid waste and opportunity for near-term M&A, this reaffirms our conviction that, there are still a lot of opportunity for growth within our solid waste business, both organically and through accretive acquisitions.I will now pass it back to Luke to talk about further while reviewing our guidance.
So starting on Page 15, we've laid out the details for the guide, we follow the same format as last year, so hopefully that makes it easy to follow. Page 15 reiterate the levers Patrick mentioned earlier that we intend to continue to pull and create equity value. We believe we have demonstrated capabilities in each of these areas since we went public, we think the opportunity set looking forward is even greater than what we've accomplished to date.Looking at page 16, we've laid out how we see it all coming together on the top line, solid waste pricing at high 4s -- 400 basis points better than the prior year in response to inflationary cost pressures. There could be upside to the pricing number depending on retention rates and actual CPI levels for the time that each of our various resets be calculated. Solid waste volume at a point to a point and a half, we expect to anchor at the high end of this range with the opportunity to beat if Canada can once and for all move beyond the lingering lockdown disruptions.Commodity prices are plus 0.25%, whereas non-recurring commodity volumes that we benefited from in 2021 are just over a 0.5 point headwind. So a net commodity impact we expect to be about 40 basis point drag. The commodity forecast assumes January's net basket price of approximately a CAD170 Canadian per metric ton, which was about CAD25 less than where the basket was when we provided our outlook in November, a decrease as an impact of about CAD20 million to revenue EBITDA and free cash flow.Liquid and infrastructure expect to generate 5% to 6 % top line growth largely on expected volume recovery associated with the reopening. The net M&A rollover, including approximately CAD40 million negative rollover from divestitures is expected to be around CAD450 million. The guidance assumes an FX rate of 1.26 versus the 1.25 average in 2021. That brings you just over CAD6.3 billion of revenue at the midpoint or just over 15% growth excluding the negative drag from divestitures. In the last set of the bridge, you can see that we have backed out for standalone guidance with the infrastructure services business that we plan to spin out. As Patrick said, the timing of the spin out is still a moving target, but we intend to execute the plan in the near-term and we'll segregate the results from this division until the transaction is consummated. The last part on the page, which excludes contribution from infrastructure services shows 5.875 as the midpoint and this is the number we would highlight 2022's base revenue guide.Turning to Page 17, you'll see that revenue range is listed on Page 16 convert to 17.10 of adjusted EBITDA and 6.80 of adjusted free cash flow, including infrastructure. As I mentioned previously, the contribution adjusted EBITDA and free cash from commodity price is about CAD20 million less than we provided our preliminary outlook in November. Those were the numbers for the business as a whole. We've also presented in the blue highlighted column in the guidance excluding our infrastructure services, 16.45 of adjusted EBITDA and 6.40 of adjusted free cash at the midpoint. Again, these are the base numbers that we think you should be expecting for 2022 before considering the impact of any net new M&A, which we'll touch on in a moment.In terms of the walk from adjusted EBITDA and adjusted free cash against the 16.45 of EBITDA, we're expecting net CapEx around CAD615 million, cash interest expense of approximately CAD340 million, neutral working capital and other net drags of approximately cash flows used for delevering, the result of which you can see at the bottom of the page, with leverage ending at low 4s. On page 18, we unpack our CapEx for both 2021 and 2022. In '21, we had normal course CapEx of CAD540 million. Offsetting this amount was CAD260 million of proceeds we received from divestitures and as anticipated, we were able to redeploy just over a CAD110 million of these proceeds into growth initiatives within our business. The remaining CAD150 million proceeds that we did not report during 2021 are normalizing as excess proceeds and expect to invest these dollars in 2022.Looking at the 2022 which is the bottom of page 18, we've identified approximately CAD150 million of incremental growth opportunities, substantially all of which will be funded with the excess proceeds from 2021. These investments are centered around new and material upgrades to existing recycling facilities, continued investment in the infrastructure and asset basis of certain new markets, and R&D development.Again all these investments being funded by the proceeds from our rationalization program. So another way of thinking about these dollars is simply a timing difference between when the cash was received and when it will be spent. The bridge does not reflect any cash proceeds for the sale of Infrastructure Division, as we intend to reinvest those dollars into M&A. Consistent with past practice, our guidance does not include any impact from future M&A. As Patrick mentioned, our M&A pipeline is robust. In page 19, we summarize how we're thinking about the landscape.There's one larger transaction within our footprint that could largely backfill the infrastructure services, EBITDA, we have carved out in our guidance. This opportunity will be immediately accretive and actionable in the first half of '22. Then on top of this larger opportunity, we anticipate continued execution of our regular tuck-in M&A program. We highlight this opportune CAD250 million to CAD300 million of incremental revenue across 25 to 30 transactions, but history has shown that there is upside to this number. If you think about those as potential upside opportunities, Page 20 shows that if executed, we could exit '22 with adjusted EBITDA of CAD1.8 billion and adjusted free cash flow of CAD730 million on a run-rate basis.
Page 21 as an overview of our RNG opportunities in a while, not highly relevant for 2022 guidance, we wanted to frame how this ties into how we're thinking about 2023. We are contemplating using the 50-50 joint venture structure range eventual third-parties from development in the landfill sector, we think they are viable RNG projects. Using conservative assumptions, we think our portion of the aggregate incremental free cash flow from these sites could be CAD150 million to CAD200 million per annum.We have finalized the arrangement for the first four sites during the process of finalizing the next five sites and the expectation that our portion of adjusted free cash flow from these nine sites will be CAD105 million to CAD125 million per year. Our portion of the expected capital outlay for these nine projects is CAD150 million to CAD180 million, the majority of which will be spent in 2023.We see RNG as a great add-on to our core business, but it will not distract us from our focus on continuing to invest in the fundamental organic and M&A levers to drive our continued growth that we highlighted earlier. On Page 23, you will see we start with our potential 2022 run rate. As this conservative estimate of the RNG opportunities to normal course and to normal course organic and M&A assumptions for 2023 and we end with an adjusted free cash flow run rate in the big 900, setting a clear path to exceed CAD1 billion in 2024.As many of you followed GFL through our history, we think you'll see that there is a consistency when we have these calls with you every quarter. As owners, our senior management team is fully aligned with our shareholders. Our 2021 results again reaffirm how that alignment drive this management team to achieve industry-leading results, even in the phase of the most challenging times. I'm very proud of what we've achieved so far and I've never been more optimistic about what GFL future holds.I will now turn the call over to the operator to open the line for questions.
Thank you. [Operator Instructions] The first question comes from Hamzah Mazari from Jefferies. Please Hamzah, your line is now open.
Good morning. Thank you. My first question maybe for Luke is just on free cash flow. It looks like the sector organically grows free cash flow in general high single-digits, maybe if you add M&A, maybe it's 10% or slightly higher. Your free cash flow profile and growth up yards much higher than peers and it looks like it's approaching CAD1 billion in the out year. Maybe walk us through what you're doing differently, how sustainable is this? Do you just feel like your markets have less competition? I know there's some mix differences in Canada versus US, but just walk us through confidence level in that free cash flow profile and why your numbers are a lot higher than peers?
Yes. Thanks, Hamzah, good morning. I mean I think it's a great question is one that we sort of sit around and think about a lot, when we look at where the sort of stock price is and try and correlate the sort of two of them. I mean, I think you're right. The normal model in this industry as you have mid-single-digit top line, with a little bit of margin expansion and at the bottom line that equate to sort of high single-digit free cash flow.I think when you look at our business, there has sort of a market selection, quality of the asset base and all the opportunity you have in the middle, we see an opportunity before considering the capital structure to beat that through the margin expansion. So you've been added sort of 5% top line growth. I think we can go a little bit of incremental margin year-over-year, which is going to help drive a bigger number at the free cash flow line.And we couple that with where I think is a unique opportunity solely for GFL, which is the delivering profile or do you think today about net interest cost and we're able to leverage that interest cost line going forward as we've reached the inflection point of self-funding our goal. There's a meaningful accretion at the free cash flow when it comes from that. And I think you put those factors together, you can take what a normal course grower is that sort of eight or nine and organically you can see that at low to mid sort of teens as a result of what I think is that unique advantage for GFL tied to the markets and the cap structure.Then on top of that when you look at what we've been able to achieve and what we continue to achieve in these sort of organic re-deployments, I think you have another five to seven basis points easily are sustainable for the next few years on that piece, right and that's how all the free cash flow growth up to sort of high teens, low 20% number. You then layer on M&A on top of that and you look at the numbers we're suggesting as this was 50%, next year is 30% with this conservative guide we're giving, the year above is another 30%. I think there's a real unique opportunity that's compounded by not just the outsized M&A and other, but just an organic opportunity that's unique to the industry. And I think, in time, as people say the results are noisy, but as that noise subsides, I think they will clearly be able to see this organic growth rate, the free cash flow, foreign excess appears and then complimented if you will by all this other value-added items we've been looking at.
Got it. The other question were just be on the infrastructure announcement, you know it's pretty clear, but could you just talk about you know what kind of proceeds do you expect? Is it too early? Is -- what does your equity pickup look like in terms of percentage ownership you want to keep? I know Patrick you're going to be Chairman of that business, is that distracting? Is that business going to grow to be much larger? Is BC Partners is going to be involved in that? Just any more detail around the execution of that.
Sure. So I mean for some people don't know the story, I mean we organically built that business starting really in late 2009 early 2010 and growing our business really over an eight year period between 2010 until 2018, we are thinking about starting to go public and what that would look like as in a public round. And grew that from zero revenue today in excess of CAD500 million on the combined sort of infrastructure business. It's always been my view that there's a significant opportunity to create a GFL 2.0 in the Infrastructure services business, when we were private company we were doing that ourselves and we stood relevant to how we sort of looked in both compared to the industry peers.I think we have a best-in-class management team in that business line, [ Ian], [ Hangry ] very successful guys, industry leaders in Canada and we just saw this opportunity, I mean easier path we could just sell it, but I think from my perspective while we sell something where we know there's a significant amount of value to be created for us as shareholders, that team reports to me today already, so it's not as if I'm getting more reports.They have lots of great ideas and COCO being one of the great ideas we've had over the last couple years being an industry leader in Canada, one of the most successful, best family-run business in Canada. Right down the middle of the family of what GFL likes to do and work, that got the brain sort of thinking on my side of what we do and just create opportunities sort of spin that out. I think when we look at what makes sense for us, the thought process said we said spin it out, keep it leverage neutral, so get back what I'd call for round numbers of CAD1.25 billion of proceeds and then get left with just under 50% equity stake in the new entity and we're going to go build it.And I think over time as we build it, we're going to create significant value for our shareholders and starting with our pro forma EBITDA just call it roughly CAD180 million, I don't see any reason why we can't take CAD180 million to CAD1 billion over sort of five, six years. There's a significant amount of opportunity, significantly under serviced and highly fragmented and when we start with the business the quality of ours, if you look at industry comps this combined entity you will have margins that are 400 to 600 basis points higher than the industry norms because of the quality of the two businesses.So it's very unique opportunity, there will be a great opportunity for our investors to participate and that have followed the GFL story and for GFL shareholders that have been a part of, that are going to contribute out of the gate, it's a great opportunity as well. So I think it's a win-win for everybody and I think we'll just create a lot more value and we probably cut off if we just sold it off.
And then just last question, I'll turn it over. You have a lot going on, you have these free cash flow numbers and a lot of detail out to 2023 and people can probably project beyond that, you've been public for two years Patrick, stock has been volatile, it's been a good stock last year, obviously, the market does what it does. But maybe talk about your role at GFL, do you plan to see this whole thing through?Do you plan on being here over a decade? How are you thinking about your role given obviously you have a lot of network tied into this, but also you've created a ton of value in the private market for yourself and others over the last decade plus.
Yes, I mean, a lot to sort of unpack there, but I think what we said today, I can't control the stock price, right there is certain things I can't control. All I can control is allocating capital, making right decisions for the business, but I think we are going to create value over the long term, that's what I've done here for sort of 15 years and I don't think that's going to change anytime soon. I think as we continue getting respect from the industry, as if thing continue to season, I'm not going to be happy until I see the stock go from wherever USD32, USD33 to USD100.And I think that's at the tip of our fingers, I think it's always been sort of the under promise and over deliver approach, I think you see that. I think we've invested a vast of what the pieces of the puzzle look like and I think that's why we came out and gave you the pieces of puzzle. I don't think there's more attractive story in the industry today. We're an amazing industry with amazing peers that have been successful over a long period of time. There's no better industry that you want to be in today than this one and I think there's a significant amount of value that can be created here over the next while.And here they I'm here because I want to win, I don't need to be here for a paycheck, I have enough money, but like anything I'm here to make money and make more money and I'm going to make more money for everybody that's on this call. So we're going to take the USD33 and we're going to get to USD100 and we're not going to stop until we get there. And then we get to USD100 then we'll align our goals but that's where I sort of feel the opportunity is here and where we want to go.
Got it. And you're still a young guy, so you have a lot of time. Thank you.
Yeah, I'm not ready to go to the mall and hold hands with my wife yet, so we're going to keep working until we get there.
All, good. I'll turn it over, thank you.
Thank you. Our next question comes from Michael Hoffman from Stifel, please Michael, your line is now open.
Hi, thank you very much. I'm going to tackle green infrastructure for a second, so you're putting in your CAD55 million, you're getting half of the value you put it in for cash and then the equity interest, help me if I got these numbers right. You then get a CAD180 million starting number, EBITDA, grow it, call it 4%, 5% organically at CAD20 million of EBITDA from M&A, that's a CAD210 million number, take a public, the peers at CAD10 million to CAD12 million as a CAD2.1 billion enterprise, I don't know, you can leverage 4.5 times take out CAD900 million that's sort of CAD1.16 billion. 45% of that is CAD520 million, that's your value plus the cash. Is that the right way everybody should think about that?
Yes. I think the math is very good. I mean, I think there's probably more of an opportunity that all depends on when you would actually take the thing public. But yes, and if you do that, you're getting close to sort of 2x on your equity. And so while it may look on the face of it today, that maybe the CAD55 million isn't getting maximum value. Following that logic, you just described, we think you're going to end up monetizing that at such a significant premium to what you would otherwise get it for today. And that's the exact rationale. And if things go well, it could be multiple higher than what you just said.
And I'm using all the low end of things. I'm not trying to overstate it, take a conservative view. That's how you create the incremental value for the shareholders. It's not that you're sure you could sell CAD55 million at 12x or something. This is creating in a relatively short window of time, how to calculate what the path to the upside is.
Correct.
2022, part of being a young company and in the development mode and all the growth, I get the adjustments. That's the noise people talk about. It's 30% of your adjusted free cash flow at the midpoint, our adjustment. How did you get that number sub-10 and when?
Mike, I hear people talking about adjustments. I mean to level set, I mean, really what we're adding back, never mind blowing up the cap structure in past years with the IPO. Really, what we're adding back is, it's CAD25 million a year at this pace of rebranding where we're painting everything bright green and you can see that as you travel all over the country. And that's a strategic decision that we do with this M&A and you can debate that. But we say, look, that is unique as we're in growth mode and it is that CAD20 million and you have CAD60 million a year roughly of transaction costs. I mean you look at the last 4 years, we've done over 125 deals and deployed over CAD11 billion. And across all of that, about CAD60 million a year in transaction costs. So CAD240 million in aggregate, over 40 years in transaction costs to deploy CAD11.2 billion. I mean that's like 2%.So, what I said to folks is if we're deploying capital at these levels, there's going to be transaction costs associated with that. I mean, we don't pay bankers, we -- but these lawyer fees and et cetera, sort of add up, and that's what it is. I'd say if you look at the last 3 years, I think those -- that number has been like CAD60 million every year and the free cash flow went from a negative to CAD300 million to CAD500 million on its way to [indiscernible]. So, I think the relative quantum of that number is naturally going to decrease through the growth of the free cash. And obviously, if we're not growing free cash at 50% a year augmented at the M&A, that number is going to come down. But if we're deploying this year, CAD2.3 billion across 46 transactions, I think CAD50 million to CAD60 million is a fair number of where that's going to shake out. So, I mean, that's the way I think about that. I do think, though, your comment about the percentage, that's naturally just coming down in meaningful steps as the base number is growing.
I think that helps clarify what -- how to think about how distant that noise really is. You introduced the idea that we ought to think about margins first half, second half. Do you want to walk us through the cadence so everybody gets that right and the Street numbers don't end up where the you can drive a truck for a range?
So, starting forward, we've included in the deck like a pro forma for next -- of recapping 2021 if you backed out infrastructure, so just so we can have a sort of right level set comparison. If you think of -- we're not going to give the quarterly guidance. I mean Q1, look historically, is sort of 22% to 23% of annual revenue in the normal seasonality cadence. Now as I said, seasonality is sort of getting a little bit wonky in Canada with the COVID starts and stops. But if you take 22.5% times the midpoint of the revenue range that CAD5.9 billion, I think that's a good sort of revenue number for Q1.I think typically, Q1 is the sort of lowest margin quarter here to the tune of 150 basis points, 200 basis points. So, if you're thinking about high-27s as the blended number for next year, you'd see Q1 is sort of, call it, high-25s. If you unpack that, you have -- solid will be a tough comp last year. If you look at last year, Q1, solid U.S. was at the highest margin of the year, which is very atypical for Q1. So normalizing for that, solid is going to have a tough comp. Liquid, the new liquid will have some expansion. And you can bank on the corporate cost bucket being about sort of 3%. So that's how I'd see Q1 shaking out. And Q2, Q3 and Q4, I think we'll follow that sort of typical seasonality cadence, peak margins in Q3 and rounding up the year ending at that sort of high-27, below 28 as per the guide.
And then Patrick, I don't think you're going anywhere. You have -- I think you have 4 kids under the age of 10. So, you're going to go to work every day. More importantly, talk about your bench strength?
We're going to do an Investor Day. Yes, it's kind of obviously being public, a week before COVID hit in March of 2020, we haven't really had the opportunity to sort of showcase -- showcase the team. And where I sit today, we have -- from my perspective, I don't know the other teams, but what this team has been able to accomplish. At the end of the day, I'm here, I'm a cheer leader, right? I'm cheering on starting with sort of Greg Yorston through to sort of Luke and his team through the HR team, through the integration team, the BD team, General Counsel. But as we go through the whole list, from my perspective, where I sit, this is a handpicking best-in-class management team that have delivered exceptional results quarter after quarter for a long period of time. And when we look at that, I think that is a big thing.When you look at the solid waste, which is the lion's share of our business, if you look at the results that this team has been able to put and execute on and the amount of M&A in the face of all these inflationary pressures and all the other things, I think it's exceptional. And I look forward to showcasing that team when we do our Investor Day in May. We haven't picked a date exactly because we're just waiting to see what happens with COVID. But I think when that onion gets peeled back and people get the look under the hood, the tractor gets hit by a bus tomorrow, I think it's going to be pretty clear that GFL is going to be just fine.So, I think we have all of the relevant pieces of that management team in place, and they're just doing and executing and continue to do great things. And it's really amazing to watch because from starting on a scale, being on the scale of the sort of sitting where I am today and then being able to watch these guys execute the playbook, it's pretty amazing. And I take my hat off to them because you know what, there's guys that are doing a better job than I did when I was in the seat and it wasn't for them and me sort of handing over the reins, we wouldn't sort of be where we are. So, I'm thankful to all of them for actually making that happen. But I look forward to showcasing the entire team in May when we do that Investor Day.
Our next question comes from Tyler Brown from Raymond James.
Obviously, pricing was really -- yes, it's really solid. It sounds like you pulled forward some PIs into Q4. But given the pull forward and the fact that CPI will layer in over the course of the year, just how does pricing look as the year plays out? Does it start high and fade? Or should it be pretty consistent as the year plays out?
So, I still think we're anticipating to start high and then walk down, but with less spade than a sort of normal year. I mean Q1, January, particularly, we have about 40% approximately of our CPI resets are hitting then. And then just a bunch of our open market stuff is focused at that time as well. So, Q1 will definitely be the biggest number. We've guided to sort of the high-4s. I think there's maybe opportunity to beat. And I think Q1 will tell that tail. So, if you can see Q1 and it will be dependent on how the CPI resets actually hit and what the retentions are like.But if you see Q1 at a high-5s, I think that's going to set the stage for a beat for the year. But we'll see how that actually shakes out. But I think, Q1 is the majority, step down in Q2 and then consistently in Q3 and Q4, albeit perhaps not as big of a step down as you would have seen in the sort of pre-COVID environment because we will have good support from large CPIs that hit in Q3, primarily in our U.S. book of business.
And then just real quick on RNG. So to be clear, despite the JV structure, that RNG CapEx will flow through the actual CapEx line. Is that right?
So, as the structures aren't all finalized, that's still sort of in flux. But either way, we'll parse it out, so you actually see the sort of apples-to-apples. If to the extent it's manifest itself on certain transactions as investment in JV, we'll be sure to sort of ring-fence and isolate so people can actually see the real underlying economics.
And then kind of in the same -- along the same thinking here, how in '23, will you account for the unconsolidated share, the EBITDA from those plans? Will there just simply be an add back to EBITDA? Or how will you show that financially? I know it's probably still in flux, but just any thoughts there?
I mean, again, in flux, because all those agreements are sort of done. But I mean, if you look in practice, I mean, you end up picking up your proportionate share of the sort of results of the JV. And if you look at those guys who in fact is already doing this, they exclude that and they add back their share of the EBITDA, right? So, there's other -- if you look at other RNG players, I mean, Darling just as an example, is one I was looking at that has a bunch of these as what the precedent might look like. But yes, I think there's something about backing out the normal course accounting and then just layering in your share of the EBITDA is probably how that ends up shaking up.
And I appreciate the pro formas in the appendix. But when you layer in Terrapure just for modeling purposes, will that new environmental services line be about CAD1 billion in revenue? Is that kind of a good placeholder?
Yes. That's a perfect place. I think about 2022 is CAD1 billion of environmental services and CAD4.9 million of solid on the the base -- out in the base guidance.
Our next question comes from Walter Spracklin from RBC Capital Markets.
So, I want to come back on the renewable energy approach and Patrick, your strategy on how to tap that resource that you have. And we've seen your competitors take or discuss and reveal some other ways to do it more of a go it alone, invest at all, invest and own the entire thing but then subject a little bit to some of the volatility that would come with that higher level of investment. You're going to partner approach. I'm hearing positive feedback on that relative to the other approach. Perhaps talk a little bit more about what led to your decision and how would you characterize the go it alone, which being much more upside, but perhaps with some more volatility?
I mean, the way -- I mean, initially, when we started talking about this, I think if you went back, if you sort of roll back across 8 months ago, I would say we knew very little about how it actually harvest dollars from this RNG. I think some of those other companies that have been going out at it alone have significantly more internal resources that have been looking at this for a while. So, I think that was one thing. Yes, we could go and figure it out. I'm not looking at this as a core pillar of -- at the end of the day, we're -- we're an environmental services company, RNG is something we sort of found that was not going to be sort of a new business line where we were going to stop doing exactly what we've been doing for the last 15 years.It was like how do we realize dollars as quickly as we can with experts that know how to do this, that can get a shovel in the ground as quickly as possible, got an inventory -- inventory to build the parts that they need to build out one of these facilities as quickly as possible, have the engineers on-site, can get us permitted and most importantly, find the best back end to be able to maximize profitability on the sale of the actual RNG. Those were all things, we didn't know anything about 6, 8 months ago.Coupled together with a lot of our sites had -- they already had gas rights that were given away. We had loyalty agreements, which require our consent to switch those from the typical electric or flaring model to RNG. So, that open the door to have a discussion about, hey, RNG certainly makes more sense in these old sort of electrical subsidized agreements. Let's go RNG, but let's split them 50-50, and it makes sense. I think it's fair. I think it will get us to the market as quickly as possible with experts that do this every day or somewhere we didn't have any, in a division that we don't have expertise in. And it's hugely profitable. So, I think you sort of, couple that together, I think we learned a lot. I think if we had to go at it on our own today, we probably could on some of these sites. But at the end of the day, it's just something we're not sort of set up to do, and let's just -- let the expert to it because they're going to do it better than we're going to do it. It was just my perspective.
Switching gears here to pricing or service and churn. Clearly, you're driving price as are your competitors. When a customer gets a big price increase, they may have to take it, but I think their lens gets a little more focused on getting the right service with the higher price, all things considered. Are you seeing either any -- are you getting worried at all about any trends in churn within your own organization? Or -- and/or are you looking at any opportunities for churn in other of your competitors that could see you grow market share as a result of this kind of very extreme pricing dynamic we're seeing emerge pertaining to end of this year?
For me, it's an interesting time in the market, right? Because even for us as companies, we're all having to be very selective about new business and ensuring that we're getting paid the appropriate price to collect new business just for the simple fact that it's a challenging labor market. It's challenging to get new equipment. Everything has been slower. I think we've all navigated the situation as an industry very well. And I think the market is -- we've all -- as competitors have been very disciplined to ensure that we continue getting price to at least cover our these internal cost inflation measures. I don't think anyone has seen myself today inflation high since it's been since '82. And I think there's very few industries like ours that have been able to sort of pass that on like we have.So, I don't think the focus -- the focus of ours is not trying to go out and grab as much market share as we can based on some of the PIs that are going through the market. I think our customer base knows that the price is needed for us to be able to remain competitive and provide that service. And they want to make sure that picked up on time. And I think at the end of the day, the luxury of our business is with the lion's share of our accounts are between CAD200 and CAD500 a month, right? So, even if they're getting high single-digit price increase, I mean, it's not a material amount for them. I think they have other bigger fish to fry than they normally would.So, I'm not seeing any -- I think the market is understanding of it. Clearly, the headlines every day in the paper is around inflation and driver shortages and fuel, insurance and R&M and supply chain shortage, backlogs. All of those sort of coupled together have remained in check. I think all of us in the industry is pretty loyal sort of customer base today. And it's not -- people aren't driving to go out and win new market share just at any cost because it just doesn't make sense today, just given what's sort of happening in the industry. But I think that's where it sort of sits at, but nothing that worries me in any really which way today.
Our next question comes from Kevin Chiang from CIBC.
If I could just clarify, I think, Luke, in your prepared remarks, you talked about when you gave the bridge for 2022 and you highlighted the upside to solid waste volumes. But you made a comment on basically Canada and maybe there's upside if we see more of a reopening. Just wondering, what are you building in for recovery within your solid waste? Is it what we're seeing today in Canada, which is obviously pretty challenged? Or do you see we kind of get back to some level of normalcy through the year?
Yes, Kevin, it's a good question. To be honest, we're sort of getting tired of trying to pin the tail on the donkey in Canada. So, it's really -- look, I think you're sitting here in Toronto with me today. We seem to be in the right direction. Let's assume we continue this, we get back in another 2 weeks, let's have full restaurants, et cetera, and we continue on this progress. If we all sort of get completely locked down again, obviously, that would be a headwind. And if by this summer, we can actually be fully enjoying life again, that could be a tailwind. So, I think it's sort of middle of the fairway right now. I do think there's upside to the number because I'm very hopeful we don't go backwards from here. But we've tried to guess for the last 2 years and been wrong, so sort of just taking a conservative approach this time.
I hear you. [indiscernible] because I've been stuck at home as well. Just on your -- when I look at 2023 run rate, you're implying about 49% free cash flow conversion. If I go back to the presentation you had this time last year, and you talked about what 2022 could look like, I think it was about mid-40s. Just wondering as we kind of look out maybe past 2023, do you see your something north of 50% free cash flow converting company? And I guess I asked that because it does seem like you have incremental free cash flow opportunities from RNG, which I suspect convert at a higher rate here? Any color there would be helpful.
Yes. So Kevin, I think it's a little -- that page you're looking at, there's some footnotes that I think are relevant because really the RNG for simplicity on that page has just been layered into the free cash number. You can see the table on the page before that tees that up and the footnotes that you're dividing the free cash in the EBITDA, but it's not apple-to-apples. So, when you do that, it would be more along that line in the mid-40s. But to your point, we don't think that's the ceiling. As you go forward from here, you've heard Patrick say and we think this can go above mid-40s.And yes, we're going to break through the 50% level and keep going from there. I think when you look fundamentally at the opportunity set that lies in front of us and where the industry as a whole is going to echo Patrick's comments, I don't think there's a ceiling there. And the asset base we have and the opportunity, we see it past continuing that march to a point where we think we can be industry-leading.
Our next question comes from Mark Neville from Scotiabank.
Maybe just on the remaining environmental service business. I mean is that something that you would consider sort of core long term? Is it salable? Or sort of would you sort of anticipate participating in selling and consolidating that market as well?
I think as long as we can keep creating value. I mean, obviously, we'll have this equity interest. And I think the plan is to take that entity public and let people participated in from the beginning, and we'll keep it. And again, we have -- there's a very good plan behind that to significantly grow the equity value of that business to the post IPO, but I think we have the ability to monetize that over time and we'll do that once we create significant value. Are you -- sorry, you were talking about -- especially, we're talking about liquid.
The liquid, the stock that will be left for liquid in the --?
Oh, sorry, my apologies. I misunderstood that. The liquid business is great. I mean, like I said, I'm a shareholder first. Someone, who pays a big number for, I think looking at what we're public paid on the face of it for US Ecology, I think US Ecology was a high-teens business. You have our business that sits at high mid-20s margins going to go to high-20s margins, great similar comparable sort of asset base. We paid sort of over 14x for that. So, I think from our perspective, we think we have a similar business, could be better in some ways, maybe not in other ways, but at least it sort of sets the benchmark of what sort of what value that's where we're sort of in the base case.But I think we're going to keep it. I think it's a great business, very comparable free cash flow margins to our existing business. There's no reason not to keep it. It's largely sort of focused on the Canadian market today. So, I think we're of the opinion we're going to keep it. It's a great business, why not, and we'll keep growing it with an exceptional management team with industry-leading margins as well in that business. So, no thoughts to get out of that anytime soon.
And just on renewables just and you gave some numbers, I think, for your capital -- your capital investment, to get to the CAD150 million, CAD200 million, roughly what's sort of your investment required? Or you just kind of like look at linear leaps?
It looks a little bit of a moving target because we're negotiating. I think some of the benefits of what we're working on today is the future capital commitments will be significantly less than the original deals and that's how some of the developers are differentiating themselves. So, I think there'll be minimal capital required from us for the future projects that you see. So, I don't think there'll be much more required given what we're negotiating with today.
And maybe just one final point of clarification. When you report Q1, even as the infrastructure hasn't closed yet, but the plan would be to report with that excluded, is that correct?
Yes, Mark, that's correct. Whether it's officially done in the financial statements proper or I need to sort of pro forma do it in the report is still sort of TBD. But either way, we will get you a clean sort of segment presentation ex infrastructure.
Our next question comes from Jerry Revich from Goldman Sachs.
Patrick, Luke, on the 7.5 million MMBtu of landfill gas projects, I'm wondering if you could talk about what proportion of that you expect to use as you build out your CNG vehicle fleet versus other RIN3 eligible applications and what proportion you expect to go to industrial non-RIN-3 applications based on the offtake plans?
So, we need about 10% of that volume and that will slightly grow but we're going to have to put in -- into our own vehicles in the sort of transportation market. And then you are sort of left with 90%. So, we're in process and have negotiated some long-term arrangements. But I think what you'll see is most likely 50% of that -- the remaining balance going into the sort of industrial commercial long-term agreement path and then the other 40% will continue into the transportation sort of RIN market today.
And Patrick, when we last spoke about the topic, you had mentioned that industrial market price is in the 20s. Is that where it's shaking out? Any update as you spent more time with the --?
So, it's still there. Obviously, as the RIN pricing has moved up, the pricing has moved up a bit. But what we're seeing now is the ability to actually share in the upside. For example, if RIN pricing went from, let's call it $3.20 to $2.40 and range to 4 or 5, whatever that -- wherever they go. These new agreements are now -- you have a sharing agreement that sort of correlated to RIN pricing. So, if they go up higher than the long-term supply agreement has to pay more and they have to pay a portion back. So, even getting a little bit more lucrative than we originally anticipated back 3, 4 months ago?
And then in terms of the plan to roll up the infrastructure and asphalt industry, not a lot of assets out there that can post mid-teens EBITDA margins. Can you just expand on what the M&A pipeline looks like for that part of the portfolio? How much heavy lifting will you folks need to do to get acquired businesses to the margin profile that your business and certainly, Coco is running at?
So, I think it comes down to exactly what we did on the solid waste and liquids waste business, right? It's how are our assets performing sort of where they are. And I think at the end of the day, it comes down to market selection and finding the right market and the right places to go. And I think the beauty of us operating in 9 provinces in Canada and 26 states in the U.S., we generally know what markets to be in. And I think you'll see us focus on markets that have better margin profile than others, right?So -- with that backdrop, I think it will be the exact same playbook that you've seen in sort of GFL, and the margin profile of GFL, and it's liquids waste business and solid waste business. So, I think you'll continue to see that. And I think you'll continue to see us be very selectful about the markets we go into with that business and the quality of businesses that we acquire under that profile. So, we'll continue to be -- our perspective is, industry-leading business and it should go pretty well.
And lastly, nice to see the pricing pull forward on the solid waste side. I'm wondering, as you look at the absences from Omicron in the first quarter, any new actions that you folks have implemented given higher overtime and other costs? Luke, you alluded to it in the potential for pricing to be higher than what you guided. So, I'm wondering how did that look through Jan and Feb as you folks have dealt with those constraints?
Look, obviously, the beginning of Jan there's sort of labor constraints. I think Omicron fortunately had a very sort of short fuse and a lot of that sort of got behind us quite quickly. I think look, the pricing in Q1 is coming in sort of strong, as I said, at some of our strongest sort of levels, and this is sort of keeps up throughout the quarter. I think there's opportunity to beat the high end of that guide that we had provided. Look, I think it's important to understand the low end of the guide at 4.5%, that's enough the number -- that's enough to cover the cost of inflation. So, even at the low end of the guide, we're sort of -- we're good.I think the opportunity is to beat or achieve the high end or beat the guide. And as I said in one of the earlier comments, I think Q1 will sort of tell the tale. First, January and February is looking promising in terms of sort of retention. But we'll see by the time we get to the end of the quarter. Again, if that's sort of a high-5s number or 6, I think that sort of sets us up for the opportunity to sort of beat the guide of the year. But I just -- I think people should rest assured that even the low end of the guide more than covers the current cost inflation we're seeing.
Our next question comes from Rupert Merer from National Bank.
Patrick, on GIP, you mentioned CAD250 million cash GFL should receive from the divestment of the infrastructure assets. And you gave us a rough estimate for the ownership stake in GIP. Can you tell us what's left to do to finalize the economics on the deal where you might have that final plan?
I mean it's going to come together sort of over the next 5 to 6 weeks. We're just looking at a bunch of sort of structure, et cetera, leading up to sort of getting that entity public in September and so, that's all pretty fluid now, but that's generally the parameters of what you'll see.
You do expect to be minority interest and have a joint venture accounting kind of along the lines of what you explained on RNG. Is that fair?
Rupert, the equity accounting won't be a joint control, is an unlikely outcome. As Patrick said, it's still fluid, but it's probably noncontrolling interest, just to have regular way equity accounting as opposed to actually joint venture accounting.
And then you mentioned the asset rationalization is largely done. Are there any assets out there? Any regions you might consider noncore? Do you anticipate seeing any other asset sales in 2022?
There's a few things left to do, which we'll expect to get done Q1 and early Q2, sort of well underway. Anticipate proceeds probably in the sort of CAD50 million to CAD60 million range.
Given those were quick, if I could lob one more quick one at you. The RNG projects first four, what's the timing on those? I know we're looking at them in 2023. Are you thinking early 2023, mid, late? How should we think about the cadence?
I think for simplicity modeling purposes, you basically get 50% of those revenues in 2023. The reality is we'd probably -- we're going to get the shovel ready and starting construction on some of them in March. So, typical construction plan on those is like 12 to 12.5 months. So, I think late Q1 or early Q2, we should be online, particularly with the largest one, which is a landfill in Michigan, that's like a 10,000 [indiscernible] site. So, we hope to have that up and running sort of April is next year.
Thank you. We currently have no further questions. I will hand over back to Patrick Dovigi for any final remarks.
Thank you so much, everyone, for joining the call. And again, I appreciate your continued support. And as always, available today to jump on the phone if there's any further questions everyone. Thanks so much.
This concludes today's call. Thank you so much for joining. You may now disconnect your lines.